Financial Ratios Used in BRR

February 11, 2009

1:00 – 2:30 PM

Financial Condition of Owner FCO)

FCO answers the question: What is the owner’s capacity to put in more money when needed by the business? It is the ratio between Personal Networth and Total Liabilities.

Personal networth will exclude: Investment in the borrowing enterprise Personal assets mortgaged or used as collateral for loan/s

Exercise to Compute FCO

For single proprietor Mr. Santos:Personal networth P4,000,0002 vehicles mortgaged to SB P 850,000 Investment in enterprise P1,250,000Total Liabilities P 750,000

Compute: the Financial Condition of the Owner. What is the equivalent BRR Score?

Answer:

Personal NW – Mortgaged Assets –

Investment in the Enterprise divided by

total loans payable =

4,000,000 – 850,000 – 1,250,000

750,000

= 1,900,000 divided by 750,000

= 2.53

= Score of 4 points

There is an additional loan being evaluated in SB Corporation for P500,000.

FCO Computation:

= 1,900,000 divided by 1,250,000

= 1.52

= Score of 3

FCO for Corporations

With more than 1 major stockholder: get the total networth of all the major stockholders.

The guidelines for single proprietorships shall thereafter apply.

Divide the net networth by the firm’s total loans payable including the proposed SB loan.

.Name Networth % Assets with

Mortgage

Inv. in Business

Abner 1.500 Mn 5 500,000 50,000

Dario 2.000 Mn 30 750,000 300,000

Harold .500 Mn 1 - 10,000

Robert 2.000 Mn 30 500,000 300,000

Rowena 2.000 Mn 34 500,000 340,000

Answers to the Exercise:

1. Major stockholders are Dario (30%), Robert (30%) and Rowena (34%)

2. Computation of individual networth for FCO : Dario: 2 Mn – 750,000 – 300,000 = 950,000 Robert: 2Mn – 500,000 – 300,000 =1,200,000 Rowena: 2 Mn – 840,000 = 1,160,000

Total 3,310,000

Assume: a) Liabilities of P750,000 b) SB loan application of P1M

3. FCO for the corporation = 3,310,000 divided by 750,000 (the sum

total of the liabilities of the firm) = 4.41 Score: 5 points Including the proposed SB loan of P1,000,000: 3,310,000 divided by 1,750,000 = 1.89 Score: 2 points

Computation of FCO: Networth Mortgaged Inv. in Assets EnterpriseDario 2.00 Mn 750,000 300,000Robert 2.00 Mn 500,000 300,000Rowena 2.00 Mn 500,000 340,000Total 6.00 Mn 1,750,000 940,000Total O/s Loans P750,000Net networth of the group P3,310,0003,310,000 divided by 1,750,000 = 1.89BRR Score equivalent = 2 points

Financial Ratios Determine the Health of a Company

Expressions of relationships between items in the F/S.

When properly interpreted, are useful indicators of financial condition and performance

Could indicate the liquidity, solvency, or profitability of a business.

Some Ratios used in BRR

Current Ratio: Current Assets

Current Liabilities

Excl. long overdue ARs and obsolete Inv.

Debt-Equity Ratio: Debt (TL/TA)

Equity (TC/TA)

Debt + Equity is always equal to 100% or 1.

Some Ratios Used in BRR

Debt Servicing Capacity:

Net Income – Drawings/Dividends+ Interest + Depreciation divided by the principal and interest amortizations of LT and ST loans for one year

Accounts Receivable Level:

AR/Sales x 360 days = AR level

Exercise: SB Merchandise Trading

Assets

Cash 150,000AR* 200,000Inventory 100,000Other Assets 550,000 Total 1,000,000

*P20,000 is long overdue

Liabilities & Capital

Accts. Pay. 75,000Notes Payable 250,000

Capital 675,000Total 1,000,000

Additional Information:

Sales P2,500,000

Net Income P450,000

Interest P50,000

Depreciation P50,000

Business Location Baguio City

Single Parent with 1 child

Loan application for P1M, 3 yrs., amort. of

P33,600 (P27,800 for principal & P5,800 interest)

Compute the ratios and the equivalent scores under BRR:

Current RatioDebt-Equity RatioDebt Servicing CapacityAccounts Receivable Level

Please use BRR Scorecard on page 23 -25 as reference for the scores for each factor.

Computation of Current Ratio:

Cash 150,000AR* (200,000-20,000) 180,000Inventory 100,000Total Current Assets 430,000Total Current Liabilities 325,000 CR = 430,000 = 1.32 325,000 Score = 3 points

Computation of Debt Equity Ratio:

Total Liabilities divided by Total Capital

Total Assets Total Assets

= 325,000 divided by 675,000

1,000,000 1,000,000

= 32.5:67.5

Score = 7.5

Computation of DSC

DSC = NI – Drawings/Dividends+Int.+Depn

Prin. & Int. Amort. LT & Int. on ST Loan= 450,000-150,000*+50,000+50,000+69,600

333,600+69,600+50,000

= 469,600 * Baguio is urban; family of

453,200 of 2 persons; std. annual

= 1.03 expenditure is P150,000

Score of 10 (p.70)

AR level

P 2.5Mn divided by 360 days = 6,944.44

P200,000 divided by P6,944.44 = 29 days

Score = 5 points

P200,000/P2,500,000 x 360 = 28.8 or 29

days

Score = 5 points

BRR Score on Cash Aspect (Maximum Points – 50) Score PointsCurrent Ratio 1.32 2.0Debt-Equity 32.5:67.5 7.5DSC 1.04 10.0AR level 29 days 5.0

Total Points 24.5